In the world of Bitcoin there are many false narratives and myths. This started with the myth of decentralisation. In this, the false idea that all users are required to run a node was promoted to mislead users and people interested in Bitcoin.
The truth; users do not need to, and should not have to validate anything. That is the entire point. This concept is itself flawed. In running software, you on your own system cannot be assured of anything. Not the integrity of the software nor the state of the network. Bitcoin is a competitive system, and it was never about decentralisation — it is sound money that is not easy to debase.
The myth attacking Bitcoin as a socialist cancer has moved to a new collectivist lie: the myth of “permission-less.”
This is most insidious, as the people promoting this slyly propound to be libertarian, and yet, in this myth of “permission-less”, promote the removal of property rights. Yes, I said that correctly, they seek to destroy property. For, with property, there cannot be “permission-less.” This is a concept alien to Bitcoin and one that must be stopped in society.
You cannot do, as some say, anything you desire. You have the right to do as you please (within reason and as long as it does not impact others).
In developing for Bitcoin, you do not have a right to alter the code. You can propose all you like, but it is miners who choose. This is important as it is miners who have the investment, not developers.
You do not even have the right to develop a “permission-less” security in Bitcoin, let alone any blockchain-based system.
The error here is that, the SEC, FCA, and other government agencies have not taken action… Yet.
ICOs and tokens
The myth and lie here is that “Bitcoin is decentralised, so this makes it different.” That is utter bull. There is nothing decentralised in any security offering. Every ICO is like any ICO in the past.
- A group seeks to raise capital,
- they issue a security offer to investors,
- and the investor sends funds to the group raising capital.
There is nothing decentralised nor new in this. An ICO simply uses a token as a marker for the security. This is falsely sold to lawyers and politicians as something new, but EDIFACT and many other token systems date back decades, and have been used (and are in use) for securities and exchange now.
The truth is, Bitcoin is a peer-to-peer system that is settled by miners. The difference is in the settlement, not the exchange.
Just as a company selling in ICOs, the middleman is the site promoting the security, the website, or the exchange, and the range of shills that are misleading the public and promoting fraud.
Luckily, Bitcoin does not forget. The beauty of Bitcoin is that the ledger is permanent. You frauds do not vanish, and the regulators can come after you with evidence years after the fact.
The fact is, the Internet is not permission-less. It is that, as long as you follow the protocol, you may have permission. The same applies to Bitcoin. If you follow the rules of the network and do not see to alter them, you have permission to build. Note; if you follow the rules.
Taking this into the realm of ICOs
We will extend this analysis into ICOs and tokens. The reason is that most of the false promotion for protocols such as Wormhole comes from the lie and misrepresentation and fraud of “permission-less” development of security tokens. It is the false promotion of an idea that you can act outside the law and raise capital, that is, use fraud to take money from others using a token, and that this is OK.
In the ICO world, we see a rise in investment newsletters and websites telling you of the ALT-coin or token of the month. The general operation of this is to have exchanges and sites managed by those who buy the tokens early, and then use social media and hype-based generation to drive the prices up — this is a practice known as securities scalping. Few seem to understand that even having a small obscure “conflict-of-interest disclosure” hidden on the site is insufficient.
To see more on this form of crime, I would recommend reading the SEC action against Thom Calandra (MarketWatch) from 2004.
There is nothing here that requires any alteration of the law. The form of settlement is not even noted in the case. As such, the fact that a blockchain is used is irrelevant. If you “scalp”, you face action. In the same way, if you raise capital, you face action. If not today, it could be 4 of 5 years down the track.
Bitcoin has a long memory.
The lie of the “utility token”
The truth is, intention matters in law. When you create a token that is stated to be a “utility token”, but is clearly a capital-raising tool, then it is a SHAM. In law, a sham is something it is not purporting to be: a spurious imitation, a fraud, or a hoax.
Tokens are issued as either a direct sale offer for a good or service that exists (such as a movie ticket) where we are not seeing an ICO form of sale, or a means of capital raising.
A digital token that is designed to be traded in an ICO may constitute a:
- Share — This confers or represents an ownership interest in a company, trust, or partnership, and is generally linked to the limited liability of the token holder in the corporation.
- A debenture that evidences the indebtedness of the issuers.
- A unit, such as a unit in a unit trust, or a right to acquire such an interest.
In any determination as to whether a security has been created, the courts will investigate more than the form of the transaction. The court will investigate the substance of the transaction. The language is not disregarded but is also not conclusive of the nature of a transaction.
The basic test is whether you have a token that is used to mark a sale, or if it can be used as a tradeable item. If you can speculation of the token, it is not a utility token. To say it is comes directly in the law of sham. It is clearly designed to be an investment instrument.
An example of a utility token would include a bus ticket. This is a ticket sold and not traded and exchangeable for a service. As the company issuing this can do so directly, the point of a “token exchange” is moot. There is no secondary market of middlemen, no investors speculating on the value of the ticket. You have a good or service, and it is used.
That is the purpose of Bitcoin, a utility token without the middlemen. And, this is what others seek to bypass. In Ethereum, Wormhole, and associated scams we see the promotion of the myth of utility tokens that are not subject to law.
That is just a lie. Bitcoin does not avoid law, it is not outside the exchange considerations, and it by no means needs to have anything added. A security is a security, and to say otherwise is to engage in misleading and/or fraudulent conduct.
Securitisation and ICOs
The securitisation of a firm’s receivables is generally associated with the sale of the existing asset pool. An alternative approach involving the sale of “future flow” transactions has also been implemented in recent years, and more closely mirrors the approach utilised by the majority of ICOs or Initial Coin Offerings.
The use of “future flow” securitisation is one where the sale is “backed” by the income to be derived in the future by the operating company, the originator of the ICO.
This can be taken to be the position used in the majority of (the misleadingly named) “utility-token” ICOs where a firm uses an Initial Coin Offering to raise capital under the pretence of selling a future product offer. The clear risk is that the operating firm may become insolvent. To date 98% of all utility-token ICOs have failed. Alternatively, the firm may “pivot” or otherwise fail in the delivery of the goods sold as a utility-token offer. This failure in performance will result in a scenario where the firm has received payment for the delivery of a good or service which it could be agreed the principles of the firm never had a clear intention to provide. We also note that unlike the standard securitisation process, the firms in an ICO rarely if ever utilise a separate SPV (special purpose vehicle) to separate the debt obligations.
In this paper, we shall examine the nature of future receivables in both a context of an ICO as an SPV and as a direct debt instrument offered from a firm in the context of future receivables, and the relevant insolvency law as compared to the law of existing receivables, and model the nature of an ICO from English-law perspective.
We note that issues may arise under the laws of multiple jurisdictions with ICOs acting as an international securitisation transaction, but without the avail of an SPV or institutional investors. The direct consequence of this is that for ICOs involving investors from the UK, English law would apply under the CCA (Consumer Credit Act, see footnote 1) and not just that of the originator (even if the law is set in contract and the terms expressly state jurisdiction).
The common approach to securitisation is for amounts which have not yet fallen due, but which are owed under an identifiable contract to be offered to an SPV-based securitisation where invoices that require payment after delivery are sold into the securitisation Special Purpose Vehicle (SPV).
- These invoices involve a payment obligation to a customer.
- Receivables are characterised as future receivables when a seller contracts on the securitisation closing date in order to sell to an SPV at some future time and as it may arise.
- This can lead to a firm having “future receivables” that are frequently not paid until invoices actually arise.
What we thus see in the ICO market is a means to use a bond or debenture as a method to bypass existing regulations.
English law of existing receivables
Assignments under English law may be legal or equitable. Legal assignments would not be a valid and available path and could not be used in an ICO as, amongst other requirements, they require that notice be provided to the debtor in order for the assignment to be effective (footnote 2).
Equitable assignments may or may not be affected with or without notice:
“All that is necessary is that the creditor shall manifest a clear intention to make an irrevocable transfer of the receivable.” (Footnote 3)
As an equitable assignment, even without notice, the sale and distribution of a utility token could be effective against the assignor and its unsecured creditors. This would be subject to any qualifications on priority or related matters that would be accepted in the existing opinions regarding the London securitisation market (footnote 4).
We note further that an equitable assignment of an equitable is a receivable, and not the assignment of a receivable itself (footnote 5) need be in writing to be enforceable (footnote 6).
We further note that the only advantage resulting from a legal assignment against a notified equitable assignment is that the assignee may, as a procedural matter, bring suit against the debtor without joining the assignor as a party to the proceedings.
As a result, we would use a transfer under an equitable assignment in our analysis of a tradeable-utility-token-ICO assignment of debt under English law.
Future receivables and an ICO
In a general analysis of an ICO offer and the assignment of a future receivable, we can argue that, speaking plainly, the assignment cannot be perfected as no future receivable exists at the time of a purported assignment. We can see that as a purported assignment of a future receivable when supported by consideration it may and should be treated as an agreement to assign the receivable.
If and when an ICO was to form a valid company (if it had not originally), and perfect the receivable bringing it into full existence, we would treat the said receivable as equity as being assigned, and the resulting equitable assignment shall be held good as against the assignor or its unsecured creditors, as if it had been created at the time the agreement to assign the receivable was entered into (footnote 7). This will in due course be subject to any and all qualifications coming from priorities or other matters (footnote 8).
In this sense, we can see the creation of an ICO token as a securitised (but unregulated) debt instrument over a future sale — the parties to a transaction being the ICO as the creator of a saleable debt instrument and the token holder as the purchaser of the debt device.
In this manner we can see the transfer of the token issued by the ICO promoter as an equitable debt, securitised in a manner that is easily transferred electronically.
The result is the creation of a consumer debt obligation that would under English law give a right to parties under the CCA (footnote 1).
Further, a token sale, if at a loss, would give the new purchaser a right to see to redeem the original investment and not the depreciated market value of the debt.
Note, this is similar to a purchase of a “distressed bond” or security on a market. The holder has the right to sue for the face value and not merely the purchase value of the instrument.
- Consumer Credit Act 1974 — legislation.gov.uk. The use of a sham instrument does not override the protections accorded to the consumer under UK law.
- Section 136 of the Law of Property Act 1925 stipulates that an assignment,
a. must be absolute,
b. is in writing under the hand of the assignor,
c. is of any debt or other legal thing in action (which allows any and all “choses” in action which are capable of legal or equitable assignment),
d. does not purport to be by way of charge only,
e. must be notified in writing to the debtor or trustee, and an acknowledgment of any and all such notice shall be obtained,
f. is subject to equities even if all Section 136 requirements are satisfied; see Law of Property Act, 15 Geo. 5, C. 20 § 136 (1925) (England).
3. Goode, R.M. “Legal Problems of Credit and Security” (1988) 2nd Ed.
4. As an equitable assignment in the fact that no goods or services yet exist to be assigned, we can act in the absence of notice. When this is the case, several factors must be considered.
a. Incremental rights of set-off will continue to arise.
— See Gout of NfId V. Nfld. Ry Co., 13 App. Cas 199, 200 (P.C. 1888).
b. The assignor may give good discharge to the debtor for any amounts received by the assignor.
— See Brice V. Bannister 3. Q.B.D. 569, 569 (1878).
c. The debtor and assignor may amend the assigned contract.
d. A party taking a subsequent assignment without notice of the prior assignment may, by giving notice in advance of the first assignee, take priority.
— See: Dearle V. Hall, 3 Russ. I, I, 38 Eng. Rep. 475, 475 (ch. 1823).
5. As this receivable arguably does not exist at all.
6. Law of Property Act, 15 Geo. 5, c. 20, § 53 (i) © (1925) (Eng.).
7. See: Taiby V: Official Receiver, 13 App. Cas. 523, 523 (H.L: 1888).
8. See: In Re Dallas, 2 Ch. 385, 385 (1904). Apart from any other qualifications notice in order to protect the priority of an assignment of a future debt against competing assignments may only be given at the point when the debt comes into existence.